In Part 1, I provided some background info on what happens with most mortgages after the close of escrow and in Part 2, I explained what depository lenders were and some of the pros and cons of those types of lenders. In Part 3, I want to continue with explaining the different types of lenders. At this time, I would like to explain the types of lenders that only engage in mortgage lending.
While there are advantages and disadvantages of using any type of lender, working with lenders that focus on nothing but mortgage loans can be much more beneficial to you as both a homebuyer and/or homeowner. The two most common types of these organizations are mortgage bankers and mortgage brokers.
For starters, mortgage bankers and brokers tend to be smaller, privately owned companies that are more attuned to their local market. Mortgage bankers and brokers may also have direct relationships and reputations with a variety of local companies and agencies that the big, behemoth, national, retail banks don't have.
These relationships and reputations can sometimes be the one thing that many prospective homeowners, especially first time buyers, are often in need of and are looking for in their lender.
So what's the difference between mortgage bankers and mortgage brokers?
Mortgage Banker: A mortgage banker is not regulated as a federal or state bank and does not take deposits from consumers. Mortgage bankers will often have many different sources of loan options, in addition to their own small suite of loan products, in which they can offer their borrowers. Mortgage bankers will often fund some of their loans through their own warehouse line of credit.
Like most lenders, mortgage bankers will also sell their loans off to the secondary market after the close of escrow. Mortgage bankers also employ their own underwriters in order to maintain control over some of their loan transactions. However, because mortgage bankers are selling their loans off to the secondary market after the close of escrow, their loans must adhere and be underwritten in accordance to the rules, regulations and guidelines for the loan program as well as the government sponsored enterprises (GSE).
When selling loans on the secondary market, mortgage bankers will earn a servicing release premium (SRP) for allowing the secondary market investor to service the loan. This SRP rate is not disclosed to the borrower.
Mortgage Broker: Mortgage brokers are organizations that originate loans on behalf of other lenders. One of the best advantages of a mortgage broker is their ability to shop around for the best loan option for a particular borrower in order to meet a particular mortgage need. Mortgage brokers typically have dozens and dozens of lending options available to offer their clients.
Mortgage brokers typically deal with wholesale lending institutions (who do not work directly with borrowers) as well as direct lenders and portfolio lenders. I will explain what wholesale lenders are in an upcoming post. Consequently, mortgage brokers do not have to employ underwriters but rather work very closely with the underwriters for the wholesale, direct and/or portfolio lenders that they contract with. Mortgage brokers also do not fund and/or service their loans.
However, because the loans that mortgage brokers are originating will be sold off to the secondary market after the close of escrow, mortgage brokers loan packages must be originated and processed in accordance to the rules, regulations and guidelines for the loan program as well as the GSE.
After the close of escrow, before the mortgage is sold off to the secondary market, mortgage brokers will earn a loan origination fee that they must disclose to the borrower, which makes mortgage brokers fees much more transparent than the fees of any other type of lender. Mortgage brokers do not earn an SRP like other lenders who do not have to disclose this fee to the borrower making the fees of other types of lenders much less transparent to the borrower.
The mortgage loan originators (MLO) that work for mortgage bankers and mortgage brokers must be licensed in accordance with the Secure and Fair Enforcement for Mortgage Licensing (SAFE) Act.
This means that MLO's for mortgage bankers and brokers must adhere to any upfront and/or any annual continuing education in order to continue originating loans. They also must submit to any federal and state testing in order to measure their education, knowledge and/or experience in the mortgage industry.
MLO's for mortgage bankers and brokers must also be subjected to FBI background checks, they must be finger printed and they also must agree to personal credit checks. Furthermore, there is a national complaint mechanism for reporting unethical and/or illegal activities on MLO's for mortgage bankers and mortgage brokers.
MLO's that work for mortgage bankers and mortgage brokers are much more regulated and monitored than the MLO's that work for banks who do not have to be licensed, tested, finger printed and or checked and monitored.
Stay tuned for Part 4 where I discuss a few other types of lenders in the mortgage industry.
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 1
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 2
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 4
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 5
CHOOSING YOUR LENDER: How Do You Know Which Lender is Right for YOU! - Part 6